The foundations and principles for Preferred Creditor Status in sovereign debt

Preferred Creditor Status (PCS) establishes a hierarchy of seniority among creditors in processes of debt relief undertaken to restore sovereign debt sustainability. Clarifying the scope and application of PCS is a precondition for implementing the principle of comparability of treatment (CoT) in sovereign debt restructuring, the principle that similarly situated creditors should bear comparable losses, because the treatment afforded to preferred creditors directly shapes what counts as comparable treatment for everyone else. In recent years, influential private-sector creditors have criticized the granting of PCS to international financial institutions (IFIs) and regional multilateral development banks (MDBs). The application of PCS to IFIs and regional MDBs in the resolution of sovereign debt crises remains unclear on several counts: who should hold the status and why they should receive this seemingly preferential treatment, and what principles should govern the lending that qualifies for it. Resolving this ambiguity matters for enabling a genuinely counter-cyclical, developmental role for global and regional public financial institutions. This commentary aims to provide that clarity. Section 2 develops a conceptual framework for the existence of PCS in sovereign debt. Section 3 assesses current practice and sets out principles for reconciling its application with lending conditions. Section 4 concludes.